The roughly $ 42 billion annual cost of retirement tax benefits is largely benefitting wealthy savers, according to the federal government’s retirement income review, which indicates they should instead leverage their home equity to help fund their retirement.
The 650-page report by former IMF director and chief Treasury bureaucrat Michael Callaghan suggests that it is time to overhaul the system to prevent high-income earners from using retirement as a tool for wealth accumulation..
Currently, 16 million Australians own nearly $ 3 trillion in pension assets, but those who hold the most super-assets, and the most tax credits on them, are typically older, wealthier Australians..
Before the coronavirus pandemic, more than 11,000 high-income Australians had retirement balances of more than $ 5 million and had annual tax benefits of around $ 70,000..
The review also makes an argument for leaving the individual’s pension contribution rate employer – the pension guarantee rate – at 9. 5 percent.
She said that moving forward with the legislative plan to increase it to 12 percent over time would cost the budget more in tax credits than it would save in old-age pension costs until 2055, and would reduce wages and the planned rise would be a bad timing during the Covid-19 pandemic.
The report said: « The weight of evidence indicates that an increase in the social security rate comes at the expense of lower wage growth. ».
Treasurer Josh Freidenberg has stated any decision to delay the increase from 9. From 5% to 12% by 2025 in the May 2021 budget, but hinted that there may be delays.
“The weight of evidence indicates that an increase in the [pension guarantee] rate will lead to lower wage growth, affecting living standards,” said Mr Frydenberg.
When asked whether the federal government will have the political will to reduce the generous tax privileges of wealthy retirees, Liberal House of Representatives Senator Andrew Bragg said: « How can you have a system that costs more than it saves when it is supposed to be a system saver? »
« This is a real problem. And the whole system needs to be looked at. It does not exist to transfer wealth across generations, it exists as a retirement income system.
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The review also raises the question whether it is worth changing the rules so that the retiree’s main residence is assessed as part of the Old Age Pension Origins Examination..
“If the home is included in the asset test, some homeowners will not qualify for an old-age pension. Others will receive a lower age pension.
She asked whether retirees should be encouraged to use the property rights in their homes to support their standard of living in retirement.
« Options for doing this include reverse mortgages, equity release plans, home purchase loans and downsizing. ». .
The report also stated that the $ 30 billion in fees earned by the major funds each year is expected to grow in tandem with the growth of super employee balances..
He again referred to the 2018 review by the Productivity Committee which indicated only 0. An additional 5 percentage points in fees throughout working life could reduce retirement balances by 12 percent.
From $ 41. 55 billion the cost of the federal budget in tax concessions, $ 18. 3 billion were tax liens for employer contributions (compulsory sacrifice and salaries), and $ 22. A billion-dollar tax concession on the profits was benefiting the wealthiest retirees.
« Only $ 1. The report said that $ 1 billion were tax concessions for personal contributions, reflecting that less than 10 percent of personal contributions are concessions.. .
The review made it clear that the super system was in place to support people to build their retirement income, not just to accumulate wealth..
« However, most retirees leave the bulk of the wealth they have upon retirement as a will. ».
High-income earners got more pension tax benefits than low- and middle-income people, the largest tax savings as a percentage of retirement contributions over their lifetime, and the largest tax benefits on pension earnings. .
The report said: « Many very large pension balances have been built up under previous contribution ceilings, and are expected to remain in the system for several decades. ».
As of June 2018, there were over 11,000 people with a balance over $ 5 million. A retirement balance of $ 5 million could bring annual dividend tax concessions of about $ 70,000.
As the Australian population has been aging, birth rates have fallen, and the proportion of people of working age has decreased relative to retirees, over time these tax breaks will outweigh the savings made by people without an old-age pension.
Whereas government spending on old-age pensions is expected to decline over the next 40 years by 2. 5 percent of GDP today to 2. 3 percent in 2060, the cost of pension tax concessions is expected to grow as a proportion of GDP and exceed pension expenditures by about 2050..
« Successive generations will have to contribute more dollars during their working lives to fund these benefits for retirees, ».
Older people have had more opportunity to contribute to retirement than young people. The rise in residential real estate values in recent decades has benefited homeowners and increased the wealth of many retirees..
With the federal budget expected to drop by hundreds of billions of dollars after Covid-19, experts say it is time for the long-awaited tax reforms.
“Most people die with most of the wealth they had when they retired. If this does not change, as the pension system matures, then the pension balances will increase when people die, and so will the inheritance..
The report said that 71 percent of people aged 65 and over receive a pension of age or other pension payments, with 60 percent of them getting the maximum rate.
For most families aged 65 or over, the family home is the main asset. Retirement makes up a small portion of their net worth.
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But the system « does not appear to provide an adequate standard of living for many retired tenants » who face income poverty.
She said renters should self-finance a higher percentage of their retirement income than a homeowner.
« Regardless of the value of the home, the homeowner can receive the same age pension as the tenant, with all other things being equal. ».
« This indicates that retirees who are wealthier – in terms of the value of their homes – can receive the same government assistance as those less well-off, ».
He said that although the Commonwealth’s rental assistance provides additional support to retired tenants, « it is well below the level that would bridge the gap in their living standards compared to homeowners ».
The review said that an increase in the Commonwealth’s rental assistance rate « will not have a tangible effect on reducing income poverty among retired tenants. ».
It has repeatedly brought to light the unfair retirement outcomes of different groups, such as women, indigenous people, Torres Strait Islanders, people with disabilities and those not covered by retirement guarantee.
While around 90 percent of employees are covered by mandatory retirement contributions by their employers, self-employed and employees who earn less than $ 450 pre-tax in a calendar month with a single employer are excluded.
About 300,000 people, or 3 percent of employees, are affected by the $ 450 threshold waiver, and there have long been calls for its end.
“They are mainly young, low-income and part-time workers – about 63 percent female,” the report said.
« Removing the $ 450 per month threshold for SG payments will not materially improve retirement outcomes, but it will improve equality in the system, especially for women and low-income workers ». .
ACOSS CEO Cassandra Goldie said the review made clear it was time to fix the « growing inequality » in the system and suggested that the federal government increase SuperSupply to 10 percent, as scheduled, but reconsider any further increases.
She said the current tax of 15 percent on employer retirement contributions means that « high-income people benefit greatly from generous pension tax benefits, at a cost of tens of billions a year to the federal budget. ».
She also indicated that the women were the main losers, with their average balance not exceeding two-thirds of the men.
In 2017/18, average retirement savings for women ages 60 to 64 were $ 279,167, compared to 344. $ 718 for a man of the same age.
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Retirement in Australia, Retirement, Finance, Josh Freidenberg
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